From Bloomberg:
http://www.bloomberg.com/news/articles/2016-08-10/you-may-be-broke-and-not-know-it
Sample of one: my friend who’s in the worst shape financially has a professional degree, as does her spouse, but the spouse also has more than $200,000 in student loan debt from the 1990s.
Debt is a tool. Like any other tool, it can either be used appropriately or misused. My neighbor is an ER nurse and has insane stories about people who come in with burns after using a blow torch to grill a hot dog or serious injury from nail guns, ladders, electric drills, and even dishwashers.
Tools all. I don’t demonize ladders because occasionally some drunk uses one to get up on his roof and throw water balloons down to his friends at a BBQ. You know THAT didn’t end well for the drunk.
I have a nephew who took on debt for undergrad and a top law school (even though he could have gone to lower ranked law school for close to free). He has paid off ALL his debts by living frugally, is on the partner track at a major global law firm (which rarely hires from the lesser ranked schools from which he had merit aid), and has had a fantastic career so far by any measure (interesting work, smart colleagues, travel to weird places for his job, constant learning and growth. )
Debt is a tool. Know what your payments are going to be and create a lifestyle which allows you to retire the debt as soon as you can.
If you have debt that you cannot pay, you darned well better know it.
We’re somewhere in the ballpark of 300k in the hole. Student loans + mortgage + small credit card debt (not accumulating interest).
I’m also 25, own a 3 bedroom house in one of the best school districts in our state, and we are comfortably paying off our mortgage and student loans (not just the minimum payments) and are rebuilding our safety net savings (medical bills caught us off guard but we still comfortably pay it).
I grew up poor. I know what poor is. Despite our negative net worth, we are not poor or broke. Broke is not knowing whether or not you’ll be able to buy groceries. Broke is being 2-3 months behind on bills and fighting just to keep your assets from being seized or your wages garnished. Being able to keep up on your bills and having a cushion isn’t broke.
I agree with blossom. Debt is a tool.
Sometimes people confuse income with net worth.
Only if you find a job and can afford the monthly payments.
No, it’s a tool either way. You can use it correctly or not. A hammer is still a tool but if you’re using it to try and paint a wall well…
All the article says to me is that there are people who graduated college and also grad school who cannot do simple math and do not understand basic economics! Go figure.
@ #8,
I’m not sure that people who graduate grad school can’t do basic math or not. I thought the article was pretty much worthless. For one thing, the article didn’t have a word of evidence supporting it’s main idea that people are broke but might not know it. As #5 said, sometimes people confuse income with net worth but even if they do the article didn’t provide any evidence that people don’t know the difference.
As far as net worth, simply A minus L, it is called owner’s equity for a business, net worth for an individual, I think most people do know what their net worth is even if they don’t keep track of it every day. It is difficult to improve net worth if one’s income is questionable. It is difficult to improve it if income barely exceeds expenses and that is the case for roughly half the people in this country.
One reason many young people will have trouble building net worth is because residential rent and home ownership costs seems to be yet another expense rising faster than income levels. That is especially true in desirable cities. It is crazy how expensive it is too live in certain cities in this country.
Medical costs are out of control and the costs of owning a car are pretty high too. Meanwhile, on the income side of the ledger, things are uncertain, that is not a pretty picture.
So, what can you do about it?
I don’t know but I get all the cord cutters and the choices not to own a car and the choices to not live in cities where it is super expensive to own a house. I get it. I was watching House Hunters last night and this young couple was shopping for a house with a $350,000 budget. They wanted to be near downtown and a big kitchen and a big backyard and yada yada. So, the real estate agent is listening to all this and she is smiling through it all and when she finally gets a chance to talk, I know she wanted to laugh, but she managed to say in a nice way it would be hard to get everything they wanted with their budget. She ended up taking them to two fixer uppers and one ready to move in house that cost $360,000.
The guy wanted the fixer uppers with big yards. The lady wanted the over budget house. You know which one they picked. She got what she wanted. Smart guy :-).
By the way, regarding new worth, Money magazine used to have one issue per year devoted to measuring it for people in this country and they did it right because they looked at it by age and income level and they had bar charts and medians and it was really well done. I’m not sure if Money still does it or not but obviously net worth depends on age and income levels and. for that matter, education levels also.
The key to building net worth is a lot of the things people talk about here on CC all the time. What to major in, how to control costs, such as education costs, savings rates, investment rates, etc., etc.
You also want to be happy. It is easy to say the sooner one gets out of the school the better and the sooner one starts investing the better but that is boiling everything down to money. You have to be happy too. One thing I notice is a lot of young people seem to be pursuing their dreams in terms of vocation even if it doesn’t pay well. They are going to be happy, one would hope. But they might not build much of a net worth. There is a ying yang there for sure.
You took me a little too literally.
Maybe an example helps because I saw it all the time with new hires and just shook my head - it was not unusual for a new MBA hire at my company to go after a couple months and buy a $70 - 80,000 car EVEN though the person has serious school loans to pay off.
The above is one of the dumbest things to do: beginning with the automatic 20K depreciation in value the first year. But add to that the monthly payment and insurance and taxes and the kid is out some $32K the first year on a stupid car, even though 99% already had nice functioning cars. A total waste of money that should have gone to paying off loans immediately. In short, the kids were not doing simple math as to where to spend their money properly.
Now, take the above example and go down the income scale and all income brackets and the lower earning grads taking these 7 year car loans are indeed underwater if they knew how to calculate what underwear means - in short, if the person loses their job they are up a creek - they are essentially the “working broke” because there are no tangible assets to cover one’s obligations. These kids should be building savings to increase assets, not paying off car loans.
In my basic example, simple math and basic economics would dictate that an expensive car purchase at the wrong time puts one in a deeper hole than they would otherwise be in.
"We’re somewhere in the ballpark of 300k in the hole. Student loans + mortgage + small credit card debt (not accumulating interest).
I’m also 25, own a 3 bedroom house in one of the best school districts in our state, and we are comfortably paying off our mortgage and student loans (not just the minimum payments) and are rebuilding our safety net savings (medical bills caught us off guard but we still comfortably pay it)."
But if you add in the value of your home, are you still 300K in the hole? No doubt your home has appreciated since you bought it, and maybe has increased even more than your student loans.
Depends on where you live. Many parts of the country have little to no home value appreciation.
Good call, BD. I didn’t even think of that. The house is worth somewhere in the just-under-300k range (according to zillow which doesn’t have the correct number of bedrooms for my house so take that with a huge grain of salt). I know our neighbors have been selling their houses for the low 300s and they have smaller houses than we do so we could probably get in the mid-300s for it if we did decided to sell it right now.
Related, if I was in a serious bind, we probably have thousands of dollars worth of antiques in our house because my grandparents were antique dealers. We’ve been slowly going through and selling ones we know we don’t want but it is a huge pain to do 
Antiques also should be counted into your net worth–particularly if your grandparents were antique dealers!
Concussion with @busdriver11, @romanigypsyeyes are you $300,000 in debt or -$300k net worth? Big difference when a mortgage is part of the equation.
The article has good data but bad terminology. It should look at how close family’s are to being homeless. The problem with a high debt load, particularly non-mortgage including cars, is that a family has no room to maneuver if one or both spouses loses a job. What one month was manageable loan notes is now an anchor.
Our goal has always been to live on one income in a dual income house. Yes our physical house was always smaller and our cars were older but our financial position at middle age is strong. As newly weds we both drove paid off beater vehicles. We committed to never have two car notes and eventually to pay cash. I’m not dumb so DW got the new car and I kept driving my beater. We also learned the futility of new cars with that purchase even though it was a modest Ford sedan. Late model used became the standard purchase.
Life has thrown us a few curveballs over the years and I’ve always slept better during those trials knowing I had room to maneuver in my finances.
It is often not about not knowing anything about math/finance/economics. It is often about spendy spending habits and not caring that one is going into debt carelessly and recklessly. People who do not care about such things are the ones who may not know that they have gone into negative net worth.
300k in debt.
We are dual income but live almost completely on my income. His paychecks go towards student loans so we can pay them off more quickly. We could easily cover all our bills if he was without a job. Indeed, we had to do it last summer in between our wedding and when he got a job a few months later. (He had quit a physically abusive job about a month before our wedding). So we were on one income (and a much lower income than I currently have) for about 5 months.
In the last month, I’ve had to fix our fridge, our AC is starting to go, our dryer quit, our deck is starting to deteriorate, and Mr R’s car is in the shop lol (we can pay all of these without a problem). There is an advantage to growing up poor (at least in my case)- we have very cheap tastes. We spend way more on our very spoiled dog than we do on ourselves.
“Good call, BD. I didn’t even think of that. The house is worth somewhere in the just-under-300k range (according to zillow which doesn’t have the correct number of bedrooms for my house so take that with a huge grain of salt). I know our neighbors have been selling their houses for the low 300s and they have smaller houses than we do so we could probably get in the mid-300s for it if we did decided to sell it right now”
Excellent, so it sounds like you have a positive net worth, even with your credit card and school loans. And that’s probably a lot better than most people your age, having student loans, no possession or real estate of value, and a negative net worth. In fact, many people don’t really even consider mortgages as a part of their debt load, because of the value of their home. It sounds like you guys are in a good shape, especially when everything stops breaking! 